In This Article

  1. What Is A Real Estate Note?
  2. What Is Real Estate Note Investing?
  3. Real Estate Note Investing

Do you want to invest in real estate, but you don’t want to deal with the hassle of buying, selling or managing a property?

There is one type of real estate investing that provides passive income, the opportunity to focus on the business side of real estate investing, and does not require maintaining a property

This is called real estate note investing. 

What Is A Real Estate Note?

Before we get started on real estate note investing, let’s first explain what a real estate note is. 

Keep in mind that the term “real estate note” may also be referred to in some circles as a “mortgage note”. 

When someone buys a property but doesn’t have the means to pay cash for it, he or she will be asked to sign a mortgage and a promissory note by their lender. The buyer will then pay part of the price as a down payment, but will be required to sign legally binding documents that require them to pay the remaining amount off over time. 

Promissory notes are essentially a contract that the buyer signs where he or she guarantees to repay their debt.

What Is Real Estate Note Investing?

Now that we’ve explained a real estate note, let’s look at real note investing, also referred to as “note investing” and “investing in mortgage notes”. 

Note investing is the process of purchasing the debt and its security instrument. 

Once you invest in a mortgage note, you become the lender, which means that you begin collecting payment from the borrower. 

Typically, those who participate in investing in notes do so by purchasing these notes at a discounted rate. This allows the investor to make more money than they invested when the borrower pays them back the full amount they had originally agreed to pay.

Next, we will look at the advantages and disadvantages of note investing. 

Advantages of Real Estate Note Investing

The advantages of investing in mortgage notes includes:

  • Passive income
  • Lower recurring expenses since investors don’t have to pay real estate agents or property managers 
  • an opportunity for the investor to make a higher return on investment, since he or she will be able to control the interest rates of the loan

Disadvantages of Real Estate Note Investing

Investing in real estate notes also carries with it its own share of risks. This risk includes:

  • the chance of the homeowner defaulting on the loan, putting the note investor at risk of losing money
  • the property can go to auction, and the investor might lose money if the property sold for less than they paid for the note
  • it can be difficult to accurately measure the profitability of investing in mortgage notes 

Note Investing Strategies

Once an investor purchases a note, there are several strategies he or she can use to make a profit. This includes:

  • buying the note, holding it and making money from the payments
  • flipping the mortgage note by partially selling it
  • buying a non-performing note and becoming the owner of the primary lien against the property

Real Estate Note Investing

Investing in mortgage notes provides an opportunity to make money in real estate without the headaches of property management

As is the case with any type of investing, investing in mortgage notes comes with risk.

Before getting started, it’s important to continue your education so that you can minimize your risk and maximize your profit.